How to stress test your income amid growing recession fears

  • Recent banking problems have made an economic downturn more possible, experts say.
  • If you’re worried about how a recession might affect you, advisers say, now’s a good time to stress test your finances.

With expectations of a recession already in the forecast for 2023, the recent failures of Silicon Valley Bank and Signature Bank have further fueled fears that an economic slowdown may be on the horizon.

But it remains to be seen when a recession — defined as two consecutive quarters of negative gross domestic product growth — will happen, if at all.

Still, many Americans — 41% — have taken steps to prepare for a possible economic downturn, according to a survey by Morning Consult. That survey, of 2,203 adults, was taken in February, long before the latest bank troubles hit.

Now all eyes are on the US Federal Reserve, which will decide whether to continue raising interest rates when it meets next week or pause its inflation-fighting strategy while it watches the banking sector.

What the Fed might do is a “rollover,” Raymond James chief economist Eugenio Aleman predicted, noting that the central bank has access to much more information about banks than the general public.

Raymond James still expects a rate hike of 25 basis points next week.

An increase will affect everything from how much interest borrowers pay on debt such as credit cards, mortgages and car loans to how much consumers can earn on their cash.

Those preparing for a recession are largely taking two steps, according to Morning Consult — 44% say they’re saving more money or building an emergency fund, and 39% say they’re cutting back on spending or spending more strategically.

A small proportion, 11%, said they store goods or food. The remaining 6% indicated “other”.

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“Really hunkering down and preparing for tough times seemed to be a popular theme,” said Amanda Jacobson Snyder, data reporter at Morning Consult.

As banking woes hit the headlines, clients have begun to signal more pressing concerns, according to Kamila Elliott, a certified financial planner and co-founder and CEO of Collective Wealth Partners, a boutique advisory firm in Atlanta. Elliott is a member of CNBC’s Financial Advisor Council.

Much of it is PTSD from the 2008 global financial crisis, according to Elliott. But the numbers today — including recent stock performance — are stronger than they were then, she said.

Still, there are a few steps advisors say you should take now to make sure you’re prepared to weather a downturn.

A lot of how a recession can affect you comes down to one thing — whether you still have a job or not, noted Barry Glassman, a certified financial planner and founder and president of Glassman Wealth Services. Glassman is also a member of CNBC’s Financial Advisor Council.

An economic downturn can also create a situation where even those still in work earn less, he noted.

As such, it’s a good idea to assess how well you could handle a drop in income.

Make sure you have some kind of safety net.

Barry Glassman

chairman of Glassman Wealth Services

“Stress-test your income against your current liabilities,” Glassman said. “Make sure you have some kind of safety net.”

While the U.S. economy still has momentum, recent banking problems could have implications for employment, according to Aleman at Raymond James.

“The biggest risk today because of these events is that companies get scared and they start to slow down hiring,” he said.

As the banks’ troubles have grabbed headlines, a client recently asked Elliott if it would make sense to move more of their funds into gold.

Her answer: No.

But stocking up on emergency cash should be a priority, she said. That way, if you get laid off, you have enough money to sustain yourself for a period of time without having to do a fire sale, Elliott said.

Granted, finding extra cash can be more difficult amid persistently high inflation. These higher costs have led some of Elliott’s customers to cut back on certain extra costs such as food delivery to find more wiggle room in their budgets.

“Some of the luxuries we had during Covid are kind of disappearing because people’s budgets are being squeezed,” Elliott said.

“People are realizing they can’t go on like they were before,” she said.

The benefit for conservative investors is that they are now able to earn higher interest rates on their cash.

“They’re finally definitely getting their money’s worth,” Glassman said.

Higher interest rates mean that consumer debt increases.

Elliott said she recently saw a credit card that charged a 30% annual percentage rate.

Experts say it may be wise for consumers feeling squeezed by high balances and rising interest rates to find a way to renegotiate what they’re paying on that debt.

Jessica Peterson | Tetra pictures | Getty Images

Even better, paying down or eliminating this debt will help create financial flexibility in your budget.

Holders of student debt should also keep in mind that they will likely soon be on the hook to resume payments on federal loans.

Because the benefits of paying those balances outright are limited, Elliott said, she tells clients to instead put the money they would pay toward those debts into a savings account, which can earn 4% interest.

“When payments resume, transfer that money and pay or pay off that student loan,” Elliott said.

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